Why the market hated Pick n Pay’s results

Pick n Pay’s interim results revealed an 11.5% year-on-year revenue increase and a higher gross profit margin which helped to grow profits from R348.8 million to R453.3 million.

Many analysts, including Wayne McCurrie from FNB Wealth and Investments, viewed Pick n Pay’s results as good and in line with expectations.

Pick n Pay CEO Pieter Boone also said he was pleased with the progress achieved across Pick n Pay and Boxer over the past six months.

However, the market did not share this view. Pick n Pay’s share price plummeted by 9% on the day of the results.

It raises the question of why the market took such a dim view of the retailers’ latest results despite the positive numbers.

One reason may be that there is a lot of uncertainty in the macroeconomic environment which will impact Pick n Pay.

Pick n Pay CFO Lerena Olivier said continued load-shedding will impact their operations in the second half of the year.

She added that inflation would continue to play a role, and higher fuel costs would also hurt the business.

“We are working hard to mitigate these but have cautioned that they will impact our second-half earnings,” she said.

However, these factors do not adequately explain the severe market reaction to Pick n Pay’s latest finances.

Expert analyst opinion

To get more insight into the share price move, Daily Investor spoke to Alec Abraham, a senior equity analyst at Sasfin Wealth.

Abraham has two decades of experience in the finance field and is an expert on the South African retail market.

He explained that although Pick n Pay’s pro forma headline earnings per share were up 25.3%, the group is still, in absolute terms, below its pre-Covid levels.

Compared to its industry peers – Shoprite and Spar – this shows that Pick n Pay is not performing well.

Spar and Shoprite managed to increase their earnings per share beyond pre-Covid levels, but although Pick n Pay’s earnings per share increased by 52%, it is still marginally lower than pre-pandemic levels.

The graph below shows how Pick n Pay, Shoprite, and Spar’s basic earnings per share.

Pick n Pay’s most recent pro forma headline earnings per share (HEPS) remains below its comparable 2019 (1HFY2020) pre-Covid levels.

Shoprite and Spar, in comparison, have increased their respective HEPS well above their comparable 2019 figures.

Another thing the market paid attention to is the individual performances of Pick n Pay and Boxer.

For the first time, the retailer differentiated its South African region sales between Pick n Pay and Boxer stores.

The split revealed that the Boxer stores grew their turnover by 27.2% while Pick n Pay stores only grew their sales by 5.4%.

Abraham said that the new reporting could be another reason for the significant drop in the share price as the disclosure reveals that Pick n Pay stores are not performing as well as investors may have thought.

Pick n Pay’s operating profit margin also raised concerns. At 2.44%, it is significantly lower than Shoprite at 5.76% and Woolworths Food at 7.3%.

Abraham is also sceptical about the group’s new Ekuseni project, which aims to cut the group’s expenses by R3 billion.

He said the project is ambitious in certain aspects that would likely be difficult to achieve.

However, he thinks Pick n Pay is moving in the right direction by continuing to invest in its central distribution infrastructure.

He further said the Boxer stores have great potential, and the fact that the group indicated it would roll out more of these stores is a positive sign.